At a recent meeting with some of the best and brightest and most successful remodelers in the country, I was struck by the significant differences in volume, gross margins, and average job size. Equally significant, these gaps appeared even though the companies all specialized in the same kind of high-end, high-dollar projects. And there usually was one core reason for those differences: How they got work.
Half of this group won the bulk of their jobs from architects who had been engaged to design a project. The other half consisted of design-build firms with design under their control—either in house or via designers hired for the specific project.
For decades, I have been a strong proponent of the design/build model. But because I met so many successful owners at the meeting who had chosen the architect-focused model, I decided to re-think my assumptions. So I did a lot of “back of the napkin” calculations of key metrics to see if I could determine if one was more profitable, i.e. “better,” than the other.
Which Generates Higher Margins?
First, gross margins. Remodelers who relied on architects to bring projects to them, often for negotiated bids, showed margins between 13% and 24%. That’s a big spread, but it’s still significantly less than the design-build firms, which had margins between 27% and 44%--a 17-point gap. The average for the architect-focused group was 17%, or a markup of 20.5%. The average for the design-build remodelers was 37%, or a mark up of 58.7%, nearly triple that of the architect group.
But here’s the catch: Overhead was lower for architect-driven companies than design-build remodeling companies; it was 11.7% for the first group, 32% for the second. This was partly because architect-driven firms didn’t need to have a lot of designers on staff like design-build firms do. Additionally, architect-driven firms need find only a few gatekeepers—i.e., architects—to drive projects to their door while design/build firms must continually market to homeowners.
Probably the biggest reason overhead is lower, as a percentage of revenue, is the average job size: $682,000 for the architect-driven model or more than five times the design-build firms’ average of $135,000.
What About Net Profit?
Although the two groups differed significantly in terms of gross margin and overhead percentages they showed very similar net profit percentages: 5.6% for the architect-driven companies and 5% for the design-build group. But the net profit DOLLARS were 42% higher for the architect-driven group than the design/build, because the combination of larger job sizes, higher volume, and lower overhead contributed more dollars to the bottom line.
So if your only gauge is potential net profit, embracing the architect-driven model would seem the right way to go. But before you abandon design-build, ask yourself several questions:
- Who are YOU and what do you do well?
- How much risk are you comfortable with?
- What’s your market like–is it rich and demanding or middle class and comfy?
- Is the local economy expanding with new jobs driven by new technologies or industries?
- Does your market support a lot of high-priced remodeling jobs? And equally important, is how intense is the competition for those jobs?
Over the years of working with remodelers around the country, I’ve been struck by how closely the personality of the company matches the personality of the owner: great sales people build companies defined by sales prowess, people with a love of high design build companies focused on the design first, engineer types build process-driven companies. First know who you are and what your market needs before making that important decision between architect and design/build focus.
Regardless of the model you choose, success over time is predicted by the ability of the owner through the efforts of the company to meet the needs of its target market, ensure the highest customer satisfaction, and produce consistent profits shared with a loyal employee base. You don’t have to be bigger to make a difference.